The G7 last night sought to reaffirm its centrality on global exchange rate issues at a time when the expanded G20 grouping is moving to centre stage on economic policy.
“We continue to monitor exchange markets closely”, the G7’s communique, issued in Istanbul, said. It welcomed “China’s continued commitment to move to a more flexible exchange rate”.
Exchange rate issues could be discussed in both the G7 and G20, Canadian finance minister James Flaherty told Emerging Markets.
Asked whether foreign exchange interventions would continue to be decided by the G7, he said that “the most important central banks” are in the G7 countries.
The G20 grouping of rich nations and key emerging markets, during its summit in Pittsburgh last month, pointedly failed to talk about global exchange rate issues. “The exchange rate issue was the great absent at Pittsburgh,” said Christine Lagarde, the French finance minister at a G7 press briefing last night.
It was announced at the G20 summit that the grouping would replace the G8 (G7 plus Russia) as the premier council on global economic governance.
The US has called for a revaluation of the Chinese currency to boost domestic consumption and correct global imbalances, while China retorts that high US government debt has triggered volatility in the dollar. Analysts fear that reluctance to address exchange rate problems threatens to derail sustainable economic recovery – and it is now unclear which global forum will debate the issue.
US treasury secretary Timothy Geithner last night sidestepped clarifying the respective roles of the two political groupings on exchange rate issues.
“The G20 has become central to the global economy, reflecting how much the balance of global power had changed. But there are going to be issues in the future where the G7 can co-operate on the broad shift of geometry in the system,” he said in response to a question by Emerging Markets at a press briefing in Istanbul last night.
Lagarde said: “We [the G7] will continue to meet. The question is to know whether we will have to issue a communiqué every time.”
It had been suggested that the G7 would step back on the issue of exchange rates, and might not even issue a communique after its meeting this weekend. When the document came, it acknowledged the growing importance of the G20, and said the G7 would cooperate with the expanded grouping on a range of issues.
These included “coordinated exit strategies, strengthening financial systems, developing a new framework for strong, sustainable and balanced growth,” and “reforming and reviewing the resources, mandate and governance of the international financial institutions”.
In comments on the health of the world economy, Geithner said yesterday: “We are seeing signs of recovery sooner and stronger and more broad-based than we had expected.” But he warned that “we are still only in the early stages of recovery.
“Unemployment is unacceptably high. The financial sector remains damaged. Conditions for a sustained recovery led by private demand are not yet fully established. We face challenging tasks ahead.”
Policymakers “must not step on the brakes too soon” in withdrawing economic stimulus, Geithner stressed “We are not yet in a position where it would be prudent to withdraw fiscal and monetary policy support.”